The highest oil price since 1985, highest freight rate since 1979 and highest demand since 1979

Published:

27 August 2004 01:38

Updated:

28 September 2011 11:28

Most analysts seem to agree that the oil price is undoubtedly being affected by non-fundamental factors and that there has been a USD 5-10 “fear surcharge or risk premium” on the price.

1) There is extremely low spare oil production capacity worldwide, and a slow down of non-OPEC production. The world has become completely dependent on the increase in oil production in the Former Soviet Union, which now, however, seems to be slowing down.

2) The increase in oil demand is the highest in 25 years and it is projected by IEA to increase from 81.1 mbd in 2Q, to 81.4 mbd in 3Q, 83.8 in 4Q 2004 and 84.3 mbd in 1Q05. Oil demand in 2004 is projected to increase by 2.6 mbd and by 1.8 mbd in 2005.

3) There are relatively low oil stocks, and “just in time” delivery policy by oil companies. OECD oil stocks were, according to IEA, 427 m barrels (bbls) in June 2004, down from 453 m bbls in June 2003 despite the 54 m bbls increase in US government stocks.

According to Paul Horsnell in an article in Oxford Enery Forum, speculators have been net sellers of oil in 2004 and have had on balance a negative effect on oil prices.

Therefore it appears to be the fundamentals that are driving the market, rather than arbitrary events. Instead of saying that the traders are driving the market, it may be more correct to say that the traders are reacting to strong fundamentals.

It does not help that the oil supply is hindered by sabotage in Iraq and that one of the world’s biggest oil suppliers is threatened by the bankruptcy of Yukos, one of the world’s single largest oil suppliers. Oil is also one of the most important strategic commodities.

The graph above shows that after 2000 oil prices moved into a different price band. The average OPEC basket price since 2000 until July this year has been close to $ 27 per barrel with a min max range from $17-above 35 per barrel. The previous similar period from March 1995 to end 1999 the average OPEC basket was just over $17 per barrel with a min max range from $9 to some $25 per barrel (calculated on the basis of monthly figures). The record prices since July may be a result of the combination of strong demand growth in particular in China, realization of a limited supply and spare oil production capacity, relatively low stocks and a rather inflexible demand. Petrol prices, for example in Europe, have not moved up with the latest crude oil price increase.

Some major oil producing countries suffer and had problems with balancing their budgets when the oil price moves below $ 20-25 per barrel.

Economists and oil industry analysts estimate that the rise in crude prices to $40 in large part reflected increasing demand as world growth strengthened and demand for oil in China boomed.

Economists use as a rough guide the calculation that a sustained $5 rise in the oil price subtracts about 0.3 percentage points from global growth in the following year. The recent $10 climb, if sustained, could shave just over half a point from global gross domestic product a year from now. A rise in energy prices feeds directly into measures of producer and consumer price inflation.

Tanker freight rates have reacted to the strong increase in demand the same way as the oil price. However, tanker supply is also increasing at a rather rapid pace as sales for decommissioning has virtually stopped. There are virtually no big tankers (that is currently trading) due for decommissioning before 2010. Failure in demand will, therefore, soon be reflected in freight rates as we may already have witnessed in the Aframax market. According the figures from IEA mentioned above, demand will continue to be strong until 2nd quarter of 2005 and will be record high in the 4th quarter of 2005 (85.7 mbd) after a seasonal downturn in the 2nd and 3rd quarter.

However, there is a great deal of uncertainty in the market. Good data continue to be a problem in the oil market and the IEA data get revised continuously Data on for example of stocks outside the OECD region is very sparse, and there is a lack of data on what is really happening in China. There is information that indicate strong build up of stocks both n India and China.